18-Jun-2013 3:31 PM

Monarch Group - not absolute ruler, but on course to profit in FY2013 with strong turnaround

Analysis

On 12-Jun-2013, privately owned Monarch Group published its annual report and accounts (for the year to Oct-2012) for the first time and issued a trading update for 1HFY2013. The group also says that, following a Nov-2011 re-financing, its turnaround strategy is on course to return the loss-making group to profit in FY2013.

Monarch Group, which includes tour operations and aircraft engineering in addition to scheduled leisure airline Monarch Airlines, is currently considering an order of up to 62 new aircraft for delivery up to 2024. Executive chairman Iain Rawlinson has recently denied that the company is seeking a public listing or new shareholders.

Nevertheless, the size of this planned aircraft order and the first-time publication of an annual report, which reveals an under-capitalised balance sheet, may well fuel speculation that the group is indeed considering just that.

Summary

Monarch Group's annual report reveals a loss of GBP26 million in FY2012, but the losses have narrowed compared to the previous year.
The group's balance sheet shows negative shareholders' equity and a net debt of GBP54 million at the end of FY2012.
Monarch Airlines, the largest division of the group, recorded an operating loss of GBP37 million in FY2012, but it has seen growth in passengers, yields, and revenues.
Monarch Airlines has the second-highest load factor among scheduled UK airlines, reaching 85.0% in FY2012.
The group reported a satisfactory start to 1HFY2013, with total revenues increasing by 12% and positive performance in all divisions.
Monarch Airlines is considering an order of up to 62 new aircraft for delivery up to 2024, as part of its expansion and replacement plans.

Losses narrowed in FY2012; balance sheet includes negative equity

Monarch Group's net result for FY2012 (year to Oct-2012) was a loss of GBP26 million, just over half the loss recorded for the previous year. The operating result was a loss of GBP15 million, compared with a loss of GBP51 million in FY2011.

The group's balance sheet looks fairly weak, with negative shareholders' equity. Its net debt at the end of FY2012 was GBP54 million (GBP2 million if restricted cash is also netted off against debt), but this does not take account of off balance sheet operating leased aircraft. Capitalising these at the rule of thumb eight times annual rental, the adjusted net debt figure is around GBP0.5 billion. The group also had a net pension liability of GBP140 million at the end of FY2012.

It seems that it owes its survival to the understanding and patience of its ultimate shareholder, Amerald Investments NV, a company controlled by the Mantegazza family. The FY2012 year end balance sheet includes GBP84 million in shareholder loans and GBP20 million in preference shares.

Monarch Group financial highlights: FY2012 (GBP million)

Year to 31-Oct	2011	2012	Change
Revenue	757.8	825.1	8.9%
Operating profit	-51.1	-14.9	+36.2
Net profit	-49.3	-26.1	+23.2
Gross debt	84.2	103.4*	22.8%
Cash**	40.6	49.9	22.9%
Net debt	43.6	53.5*	22.7%
Capitalised operating leases	457.6	447.2	-2.3%
Adjusted net debt	501.2	500.7	-0.1%
Equity	-99.8	-141.7	-41.9

Monarch Airlines, the biggest group division, is responsible for the losses

The Monarch Group consists of three divisions: Monarch Airlines, Tour Operations and Monarch Aircraft Engineering. Group revenues increased by 9% in FY2012, with Engineering seeing the fastest growth (+15%). Monarch Airlines' revenue grew by 11%, but it made an operating loss of GBP37 million (just over half the loss of the previous year). The airline's operating loss before impairments and write downs was GBP19 million, narrowed from GBP59 million in FY2011. The other two divisions were profitable in both FY2011 and FY2012.

Monarch Airlines' First Aviation division, a flight broking operation, offers scheduled and charter capacity to tour operators. The Tour Operations division has three elements: Cosmos Holidays (package holidays), Avro (which provides charter seat availability) and somewhere2stay (which offers low-cost accommodation). Monarch Aircraft Engineering provides MRO services to Monarch Airlines and to third party customers such as easyJet, Alitalia, Thomson Airways, Wizz Air, Cyprus Airways, DHL, Air Arabia, Emirates and LOT Polish Airlines.

Monarch Group external revenues by division: FY2012 (GBP million)

External revenue	2011	2012	Change	% of 2012 total
Airline operations	457.8	509.3	11.2%	62%
Engineering services	21.1	24.3	15.2%	3%
Tour operations	278.8	291.4	4.5%	35%
Group	757.8	825.1	8.9%	100%

Monarch Group profit before interest and tax by division: FY2012 (GBP million)

	2011	2012	Change
Airline operations	-70.1	-37.2	-46.9%
Engineering services	2.9	5.3	82.8%
Tour operations	5.8	5.6	-3.4%
Group	-0.8	1.2	-250.0%
Net interest	-4.5	-4.9	8.9%
FRS17 adjustment	-3.5	-3.4	-2.9%
Total	-70.2	-33.4	-52.4%

Monarch had the second highest load factor among scheduled UK airlines

Monarch Airlines' total passenger numbers grew by 5% in FY2012 and load factor gained 1.5 ppts to reach 85.0%, the second highest among scheduled UK airlines (behind easyJet). More than 80% of its capacity is scheduled as the carrier has successfully grown away from its charter operating past. According to a press release of 12-Jun-2013, total revenue per available seat kilometre (RASK) grew by almost 14% in FY2012.

Monarch Airlines operating highlights: FY2012

Year to 31-Oct	2011	2012	Change
Total pax 000	5,956	6,277	5.4%
Total seats 000	7,134	7,382	3.5%
Load factor %	83.5	85.0	+1.5 ppts
Total RASK GBPp	3.50	3.97	13.5%
Core seat RASK GBPp	2.88	3.28	14.1%
Ancillary seat RASK GBPp	0.58	0.64	10.7%
Ancillary non seat RASK GBPp	0.04	0.05	14.6%

1HFY2013: '…a satisfactory start…'

The group announced limited details on trading in 1HFY2013 (Nov-2012 to Apr-2013) and Mr Rawlinson said: "The Group has made a satisfactory start to the financial year". Total revenues increased by 12%, with Monarch Airlines' revenues up 10%, Tour Operations' revenues up 15% and Aircraft Engineering's revenues up 17%. The Engineering division accounted for 14% of revenues in the half year, compared with 3% for FY2012, while Tour Operations 1H revenue was 23% of the total versus 35% for FY2012. This reflects the different seasonality of these two business areas, with tour operating stronger in the summer and engineering in the winter.

The group also said, in connection with 1HFY2013, that "Monarch Airlines has achieved good growth in passengers, yields and revenues, Tour Operations has exceeded its targets while Engineering has also had a solid start to the year. […] this performance underlines the substantial progress we are making towards our target of restoring the Group to overall profitability by November 2013."

Monarch Group external revenues by division: 1HFY2013

External revenue	1HFY2012	1HFY2013	Change	% of 1HFY2013 total
Airline operations	187.4	206.4	10.1%	63%
Engineering services	40.3	47.0	16.7%	14%
Tour operations	65.9	75.5	14.6%	23%
Group	293.6	328.9	12.0%	100%

In 1HFY2013, Monarch Airlines saw total passenger numbers grow by 7% and load factor gained 0.5 ppts to 79.0%. The company increased the number of routes from 35 in 1HFY2012 to 112 in 1HFY2013 and has launched a new base at Leeds-Bradford for summer 2013. RASK continued to grow, up by 8% in the half year, with core seat RASK up 4% and ancillary seat RASK up a very strong 39%. Ancillary revenues increased by more than GBP10 million year-on-year to reach GBP34.5 million in 1HFY2013.

Monarch Airlines operating highlights: 1HFY2013

Year to 31-Oct	1HFY2012	1HFY2013	Change
Total pax 000	1825	1952	7.0%
Total seats 000	2326	2471	6.2%
Load factor %	78.5	79.0	0.5
Total RASK GBPp	3.44	3.72	8.3%
Core seat RASK GBPp	2.86	2.99	4.3%
Ancillary seat RASK GBPp	0.45	0.63	39.2%
Ancillary non seat RASK GBPp	0.12	0.10	-14.5%

Monarch Airlines' short/medium-haul leisure focus from six UK bases

Monarch Airlines operates only international routes, with a single class cabin, focusing on leisure routes in the Mediterranean and ski routes in the Alps. Around three quarters of its seat capacity is to Western Europe, one fifth to Eastern/Central Europe and a small percentage to North Africa. It has six bases in the UK: London Luton, London Gatwick, Manchester, Birmingham, Leeds-Bradford and East Midlands.

Monarch does not have a very strong market share at any of its UK bases, most of which are fairly fragmented markets. Moreover, the major LCCs are key competitors at all of these airports. At Manchester, it is number two with 11%, behind Ryanair (14%) and just ahead of easyJet and Flybe on 11% and 10% respectively. It is also number two at Birmingham, with 23% of seats, just behind Flybe (also 23%) and ahead of Ryanair's 18%. (Source: Innovata, week of 17-Jun-2013).

At its largest base by seats, Gatwick, it is the number three carrier with 7% of seats, behind easyJet (45%) and British Airways (17%). At Luton, home to its head office, it is the fourth biggest airline, with 8% of seats, behind easyJet, Wizz Air and Ryanair. At Leeds-Bradford it is third with 9%, behind Jet2.com and Ryanair, and it is fourth at East Midlands, behind Ryanair, Jet2.com and Flybe. (Source: Innovata, week of 17-Jun-2013).

Monarch Airlines destinations: 2013

Monarch Airlines top 10 hubs by seats: 17-Jun-2013 to 23-Jun-2013

Monarch Airlines has leading positions on a number of its routes

Monarch's top 10 scheduled routes by seat capacity all involve destinations in Spain (including the Spanish islands) and Portugal, reflecting its sun destination leisure focus. Although Monarch does not have strong market share overall at its six UK airports (it is not number one in any of them and is number two in only two airports - Manchester and Birmingham), it has a stronger position in many of its routes. Among its top 10 routes by seats, it is the number one airline on six (Manchester to Faro, Alicante and Tenerife Sur; Birmingham to Malaga and Palma de Mallorca). (Source: Innovata, week of 17-Jun-2013).

The carrier claims that it was number one or number two on 60 routes, accounting for 80% of its capacity, in FY2012. In 1HFY2013, it says that it was the leading airline to and from its scheduled destinations from Midlands airports (East Midlands and Birmingham), with a 25% market share versus 17% a year earlier. From and to London Gatwick Airport, Monarch says its share of its scheduled destinations increased year-on-year from 11.9% to 14.6% and, from and to Manchester Airport, where Monarch is the leading airline on its scheduled destinations, market share increased from 28.3% to 30.1%.

According to Monarch, its overall share of total UK traffic to its scheduled destinations increased year-on-year from 10.0% to 11.7%. Innovata data for the week of 17-Jun-2013 show it to be the UK's fifth biggest airline by seats (behind BA, easyJet, Ryanair and Flybe) and the fourth biggest on international routes.

Monarch Airlines top 10 routes by seat capacity: 17-Jun-2013 to 23-Jun-2013

An order for 62 new aircraft

According to the CAPA fleet database, Monarch Airlines has a fleet of 38 operating leased aircraft in service at 17-Jun-2013. This includes eight widebody aircraft and 30 narrowbodies. The fleet is ageing, in particular the widebodies, with an average age of 26 years for the 757s, 23 years for the A300s and 14 years for the A330s. The A320 family has an average age of 11 years, but has taken delivery of two new A320s and two new A321s in 2013 so far, as replacements for retired aircraft.

Monarch intends to make a decision by the end of the current financial year on an order for 62 aircraft, for delivery up to 2024, both for replacement and expansion. It is considering all major manufacturers for the fulfilment of this planned order. Traditionally, Monarch finances its aircraft through operating leases and, if it does not seek fresh equity capital, looks likely to continue to rely on leases and shareholder loans/preference shares.

Monarch Airlines Fleet Summary: as at 17-Jun-2013

Aircraft	In Service	In Storage
Airbus A300B4-600R	3	0
Airbus A320-200	9	1
Airbus A321-200	21	0
Airbus A330-200	2	0
Boeing 757-200	3	0
Total:	38	1

Monarch Airlines average fleet age: Jun-2013

Source: CAPA Fleet Database

CASK is consistent with LCCs, but not ultra-LCCs

Monarch's press release of 12-Jun-2013 states that Monarch Airlines' RASK in FY2012 was GBP3.97, equivalent to EUR4.99. This figure, together with the airline's reported revenue and operating result, can be used to calculate its cost per available seat kilometre (CASK). The chart below shows CASK against average sector length for Monarch Airlines and other European airlines.

This demonstrates that its unit costs, adjusted for distance, are broadly comparable to LCCs such as easyJet and Vueling, but are higher than those of ultra-low-cost carriers such as Ryanair and Wizz Air. One or both of Ryanair and Wizz Air are significant competitors at all of Monarch's UK airports and easyJet is also a major player at a number of them. All three of Wizz Air, easyJet and Ryanair are bigger than Monarch in terms of destinations, routes and passenger numbers and the latter two operate to the same kind of leisure destinations as Monarch (and a good deal more).

It is a challenge for Monarch to compete with either of them on network and virtually impossible to compete with Ryanair on costs. While Monarch has a number of strong market positions, it would be vulnerable to any aggressive expansion by other LCCs onto its routes. Moreover, its leisure focus may make it more sensitive to economic downturns, although this may be partially mitigated by the group's presence in the typically more robust MRO segment.

Unit costs (cost per available seat kilometre, EUR cent) and average sector length for selected European legacy and low-cost carriers: 2012*

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